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Informist, Friday, Jul. 17, 2026

 

By Shweta

 

NEW DELHI – Retail inflation maintained its upward trajectory in June, crossing the Reserve Bank of India's medium-term target of 4% for the first time in 17 months. But the worst is not yet over and inflationary pressures are likely to intensify in the coming months, especially in July, with risks from geopolitical uncertainties and unfavourable weather, according to economists. Having said that, economists see India's inflation remaining well within the RBI's upper tolerance limit of 6%. To note, with the June print, the RBI's Monetary Policy Committee can also delay the interest rate hike decision at the August meeting.

 

Headline inflation rose to 4.38% on year in June, an 18-month-high, from 3.93% in May. According to economists, headline inflation is seen rising to 4.5–4.9% in July, topping the print of June, which was sharply high due to war-led food and fuel inflation continuing to seep into consumer prices.

 

Considering the evolving El Nino and persisting geopolitical tensions, it is too early to say CPI has peaked, Devendra Kumar Pant, chief economist at India Ratings and Research, said. "However, we are not seeing a situation where it (inflation) will go beyond 6% (for 2026-27 (Apr-Mar))." The rating agency has projected India's inflation to inch up to 4.9% in July and average 5% in FY27, broadly in line with the central bank's projection of 5.1%.

 

According to Pant, the risks to food inflation have gone up due to below average rainfall. As of Wednesday, India received 4.3 millimetres of rainfall, 57?low the normal of 10.0 millimetres, the Indian Meteorological Department said. Below average rainfall along with a low base as well as excessive heat are expected to add to the pressure on food inflation, economists said.

 

Food inflation rose to 5.32% on year in June from 4.78% in May. "The rise was driven not only by the fading of a favourable base effect but also by persistently high summer temperatures, which continued to normalise inflation from the record-low levels seen earlier," economists at CRISIL said in a note.

 

This increasing risk from food inflation will add to the existing inflationary pressure from volatile energy prices, economists said. The 'electricity, gas, and other fuel' segment saw 1.75% inflation in June, higher than 0.81% in May, while transport inflation rose 4.31% in June from 1.75% in May. "Producers are gradually passing on the sharp rise in the cost of energy and other inputs, as well as transportation, to consumers, which should raise core inflation," economists at CRISIL said. In May, oil marketing companies cumulatively hiked petrol and diesel prices by around INR 7.5 per litre in the wake of the West Asia war. "Retail prices of petrol and diesel are expected to remain elevated this calendar year," they added.

 

June was the first month to see the full impact of the fuel price hike in May on CPI. "The broader effect is expected to reverberate through the economy through higher transport costs," economists at CRISIL said.

 

With limited progress in West Asia peace talks and renewed tensions in the region leading to the shutdown of the Strait of Hormuz, crude oil prices have inched up again. The Brent crude oil September delivery contract is currently at nearly $86 per barrel, much higher than the sub-$73 a barrel before the war. "This has added an element of uncertainty to inflation as well as growth. A resolution of the conflict and opening up of the Strait should lead to lower oil prices in the medium term," economists at ICICI Bank said in a note.

 

The first impact of the war was seen in the wholesale price index in April, while its retail counterpart CPI continued to grow benignly. Since then, the two metrics are diverging widely at about 549 basis points, which is the highest since August 2023. The divergence between WPI and CPI, coupled with volatile crude oil prices and weaker than normal monsoon "suggest likely further consumer price pass-through in the coming months," IDBI Bank said in a note. WPI inflation in June rose to 9.87% from 9.68% in May.

 

Economists see oil prices remaining higher in the near term, implying an upside risk to inflation but a downside risk to growth. Post the June meeting of its Monetary Policy Committee, the RBI had projected inflation at 4.2% for Apr-Jun, 5.1% for Jul-Sept, 5.9% for Oct-Dec and 5.4% for Jan-Mar. RBI Governor Sanjay Malhotra had said, "...there are considerable risks to the MPC's baseline assessment of inflation and growth due to the uncertainty about the duration and intensity of the conflict, magnitude of its spillover effects and the pace of restoration of supply chains." Amid the uncertainties, Malhotra had said he expects headline inflation to be near the upper tolerance limit of 6% in Oct-Dec, and the impact of the supply shock is expected to wane in after March.

 

POLICY OUTLOOK

At 4.38% for June, CPI inflation averaged 3.93% for the June quarter. The lower-than-the-RBI's projected inflation average for the quarter will give the Monetary Policy Committee some headroom before it changes its stance. It will also allow the RBI to continue to work on growth-supportive measures rather than maintaining inflation within its tolerance band. "The Reserve Bank of India (RBI) is expected to maintain its policy rates given the supply-side nature of inflation shocks," Gaura Sen Gupta, chief economist at IDFC Bank said in a note.

 

The economist is of the view that monetary policy is not the ideal tool to respond, given that it operates primarily through the demand channel. "A rate hike to address inflation risks would only exacerbate demand destruction," Gupta added. Economists expect the RBI to remain on an extended pause in FY27 and look through any supply-side driven inflation. However, they have not ruled out the possibility of a rate hike if weather-related disruptions push headline inflation materially higher.

 

Economists noted it is unlikely that the RBI's Monetary Policy Committee will be in a tightening mode in the near term. But with inflationary pressure mounting, the RBI may tighten its monetary policy in the last quarter of the current financial year. In the past, the central bank had raised interest rates only after headline inflation breached the 6% threshold for several months.

 

The central bank kept the repo rate unchanged at 5.25% at the Monetary Policy Committee's last meeting in June. In fact, the committee has not changed the repo rate since December 2025, when it had cut interest rates by 25 basis points.  End

 

US$1 = INR 96.28

 

Edited by Avishek Dutta

 

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